Former Chief Economic Adviser to India, Arvind Subramanian, has made a sensational claim that India's GDP growth rate may have been over-stated.
Subramanian, who had been one among key economists and also the Chief Economic Adviser during the years 2014-18, a period when Arun Jaitley presented budget documents made this startling claim in a research paper published by Harvard University.
While India's GDP growth-rate hovered at 7 percent between financial years 2011-12 through 2016-17, Subramanian states that actual growth rate could have been in the range of 3.5 to 5.5 percent.
Subramanian, asserted that the overestimation was not political in nature and that this must be distinguished from recent controversies over a back-casting exercise and "puzzling upward revisions" for recent years.
He says, "A variety of evidence- within India and across countries- suggests that India's GDP growth has been over-stated by about 2.5 percentage points per year in the post-2011 period, with a 95 percent confidence band of 1 percentage point."
His paper investigates various factors and counters the methodologies employed by India's statisticians to estimate real GDP growth. In fact, he says that a change in methodology since 2011-12 had led to overestimation of growth.
Implications: Macro-economic policy too tight. Impetus for reform possibly dented. Going forward, restoring growth must be highest priority, including to finance govt.’s laudable inclusion agenda. GDP estimation must be re-visited. n/n— Arvind Subramanian (@arvindsubraman) June 10, 2019
Subramanian in his research paper writes on various factors that support the hypothesis that GDP calculations were perhaps not in sync with other factors that he illustrates in his report.
The research paper questions that growth metrics such as real investment, export volume growth, credit-GDP ratio, had fallen even while GDP had reportedly grown. To address that and the question on impact on NIA estimates, Subramanian showed a graph of 17 indicators and showed their correlation to GDP growth between the years 2001-17.
Some of these factors that the former Chief Economic Adviser as reported by him were, "electricity consumption, 2-wheeler sales, commercial vehicle sales, tractor sales, airline passenger traffic, foreign tourist arrivals, railway freight traffic, index of industrial production, index of industrial production (manufacturing), index of industrial production (consumer goods), petroleum consumption, cement, steel, overall real credit, real credit to industry, exports of goods and services, and imports of goods and services."
"These indicators are also chosen because they are produced independently of the CSO. We do not use tax indicators because of the major changes in direct and indirect taxes in the post-2011 period which render the tax-to-GDP relationship different and unstable, and hence make the indicators unreliable proxies for GDP growth."
By plotting the growth of these indicators vis-a-vis that of real GDP growth, Subramanian made the following analysis.
Evidence 1. Growth correlations between 17 simple, macro-ish, & "independently produced" indicators and GDP break down post-2011. Pre-2011, 16 positively correlated with GDP; post-2011, 11 negatively correlated. 4/n pic.twitter.com/PRHmYlZId2— Arvind Subramanian (@arvindsubraman) June 10, 2019
Evidence 2. Growth of most of these "macro-ish" indicators declines sharply post-2011 compared to pre-2011, but measured GDP growth remained broadly similar. 5/n pic.twitter.com/b3dyfWwWEc— Arvind Subramanian (@arvindsubraman) June 10, 2019
The graph within the research paper as tweeted by Arvind Subramanian.
"First, 16 out of 17 indicators are positively correlated with GDP growth before 2011 (they fall to the right of the purple, vertical line). However, post-2011, 11 out of 17 indicators are negatively correlated with GDP (they fall below the green, horizontal line).
"Second, all the correlations should be distributed around the 45 degree line of equal correlation in the 2-periods; that is, each indicator might have a different structural relationship with GDP growth (and so might be more or less correlated with GDP growth), but the correlation should not vary substantially before vs after 2011-12 unless structural changes have occurred at the same time as the GDP methodology revisions. Instead, we find that 5 out of the 17 indicators are indeed close to the line but 11 out of 16 are below the line, indicating a different correlation between the 2 periods with a substantially lower (or negative) one in the second. In other words, the correlations between most indicators and GDP growth broke down in the post-2011 period."
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KEY INDICATORS FOR GROWTH
Elaborating further, one of the key analytical observations made by Subramanian in his report are four parameters that could function as key growth metrics.
"There could be several such indicators that co-move with growth but for the sake of tractability we restrict ourselves to four: Credit (C), Exports (X), Imports (M), and Electricity consumption (E). These are available for a large sample of countries. They are all not difficult to produce. They are typically produced independently of the statistical agency. For example, credit data is produced by Central Banks, trade data by customs authorities, and electricity data by regulators. And the trade data can typically be cross-checked with data from partner countries."
Infographic: How GST impacted GDP growth of various countries
WHAT THE FINDING IMPLIES:
GDP related growth has been used as a narrative to show various factors. A higher GDP growth rate implies a growing economy. It also becomes the perfect counter to the debate on growth in jobs, income, and agricultural distress. Such fancy rates also helps media outlets bestow fancy titles such as "fastest growing economy".
"Growth over-estimates matter not just for reputational reasons but critically for internal policymaking," he writes in the paper.
Subramanian also asserts that the absence of trust-worthy numbers misleads the overall health of economy. Providing an example, he says, "if India’s GDP growth had been appropriately measured, the urgency to act on the banking system challenges or agriculture or unemployment could have been very different."
"The Indian policy automobile has been navigated with a faulty or even broken speedometer," he adds.
However, that a hypothesis that our GDP growth-rate has been weaker than estimates from statisticians should not dent aspirations. In fact, Subramanian admits in his paper, "The results in the paper suggest that the heady narrative of a guns-blazing India must cede to a more realistic one of an economy growing solidly but not spectacularly."
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Some of the assessments lead Subramanian to seeking better independence and hiring of stellar statisticians.
"If statistics are sacred enough to require insulation from political pressures, they are perhaps also too important to be left to the statisticians alone. Nothing less than the future of the Indian economy and the lives of 1.4 billion citizens rides on getting numbers and measurement right. As we measure, so India will go," he concludes.
Indian economy has caught a deadly flu and there's no quick pain-killer
Now Modi govt's own Chief Economic Advisor says GDP overestimated substantially.— M K Venu (@mkvenu1) June 11, 2019
India Grew at 4·5%, Not 7%, Between 2011-12 and 2016-17: Ex CEA Arvind Subramanian https://t.co/2BzMWlkKis via @thewire_in?lang=en
The non-politicised nature of the changes can be seen from the fact that the new estimates bumped up growth for 2013-14, the last year of the UPA-2 government - Arvind Subramanian— Ravi Nair (@t_d_h_nair) June 11, 2019
But, it was Modi govt upwardly revised 2013-14 GDP data in 2015https://t.co/5W2FdwFGlh
Probably the weakest link in the argument. Given tht back-series data isnt available for 2001-11, no way to figure out where the numbers wud have landed vis-a-vis global regression if they were available. Ergo, outlier vs out-of-line is a non-sequiturhttps://t.co/tsQmhypycB— Somnath Mukherjee (@somnath1978) June 11, 2019
Astounding too, the wisdom that pours out of people once they demit Office, whereas the public would have been better served had all this come out before. Discretion is the soul of valour indeed.— Nistula Hebbar (@nistula) June 11, 2019
It’s not hindsight.— Ramdas Sunder (@RamdasSunder) June 11, 2019
He has looked at data that normally correlates well to GDP growth. He says that if the correlation was true in 2012-‘17, then GDP growth was over-stated.
Remember: His job as CEA is not to question data, but to formulate policy based on it.
Worth reading this— Srikanta K???amacarya (@shrikanth_krish) June 10, 2019
One thing that puzzles me is - why did the RBI persist with tight policy though the government was purportedly pushing for a looser regime?
Was the RBI more optimistic about the economy than the Ministry of Finance? https://t.co/2jGipsy90K
When the outgoing CEA admits he allowed a 4.5% growth to be dressed up as 7 %, he casts a shadow on all data going out of India. Government must explain, maybe a white paper on GDP figures is called for. https://t.co/plvGi7jipD— Suhasini Haidar (@suhasinih) June 11, 2019
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